Commentary: Richard Russell has turned bearish on major trend

Russell is the editor of Dow Theory Letters, a newsletter he has been writing continuously since 1958. That makes him the granddaddy of the investment newsletter arena; no other current investment newsletter editor has been publishing for as long and most don't even come close. In fact, many of today's investment advisers weren't even born when he inaugurated his letter.

I pay attention to what Russell is saying for the simple reason that his long-term record is quite good. Consider the performance of a hypothetical portfolio that switched between the stock market and cash according to Russell's grading of the stock market's major trend, as opposed to his grading of the shorter-term trend, where his record hasn't been as good. Over the past 28 years, this portfolio is tied for first place on a risk-adjusted basis among the market-timing newsletters tracked by the Hulbert Financial Digest.

Paying attention to Russell nevertheless baffles many, who find the day-to-day musings on his Website to be often inconsistent, if not outright contradictory. But just as a Freudian analyst can eventually find coherence in the free-associated ramblings of a client, devoted Russell followers claim they are able to make sense of what he writes.

Russell himself acknowledged that earlier this week in response to a subscriber who complained that Russell's musings were "all Greek" to him and that he "didn't understand" what Russell was trying to say.

Russell's response: "I don't expect a new subscriber to take it all in and understand it all on the first reading or even in the first few months of readings. The stock market and its 'language' is a 60-year learning experience for me, and how in the world can anyone absorb it all in one or 10 or 20 readings ... [New subscribers need to] have patience, to read the sites and 'work on it' for three or four months or preferably for a year, and by that time a lot of what I'm writing and a lot of chart-reading should make sense."

Though I have been reading Russell's writings for more than 28 years, I must confess that I still have trouble integrating all of what Russell says into a coherent narrative. But, as best as I can interpret, Russell recently turned bearish on the stock market's long-term trend.

I base my interpretation on an analysis Russell conducted a couple of days ago of a chart of the Dow Jones Industrial Average
DJIA, -1.56%
back to 1982, some 26 years ago. On that chart, he drew a trendline that connected the low of the stock market in August of that year to the low of the 2000-2002 bear market, which occurred in October 2002.

What Russell found: "As you can see, the long-term trendline has been violated [by the stock market's recent action]. That means that the rate-of-growth in the Dow has been reversed. Until proven otherwise, the long-term trend of the Dow is now down."

Russell goes on to address those who try to wriggle out from underneath the force of this bearish conclusion by dismissing the Dow as representing just 30 stocks. "Let's take the S&P Composite
SPX, -1.66%
which includes 500 large-cap stocks. Same thing here, the long rising trendline has been violated."

To be sure, not all of Russell's recent musings have been this apocalyptic. For example, he also writes that it is at least potentially bullish, from a Dow Theory point of view, that the Dow Jones Transportation Average
DJT, -0.46%
in July did not come close to breaking its lows from earlier in the year, even as the Dow Industrials did sink to new lows.

Nevertheless, on several occasions in recent years Russell has chosen to completely ignore the signals that he previously had said the Dow Theory was about to issue or, alternately, he has interpreted those signals as having only minor significance. I think the same will prove to be the case for Russell this time around, given how unambiguously and boldly he stated that "until proven otherwise, the long-term trend of the Dow is now down."

Undoubtedly, however, Russell followers will endlessly debate my interpretation, just as they will his many other pronouncements.

But, hopefully, despite being 84, Russell will continue to provide those followers with many more years of musings to argue about.

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